Small Business Corporation (SBC) Taxes vs Standard Business Taxes in South Africa: A Comprehensive Guide for Entrepreneurs

For entrepreneurs and small business owners, understanding how tax rules affect their company can make a significant difference to cash flow and long-term growth. In South Africa, businesses can qualify as Small Business Corporations (SBCs) under Section 12E of the Income Tax Act, giving them access to preferential tax rates. Companies that do not qualify for SBC status pay standard corporate taxes. This article explains the differences, benefits, and considerations in detail.

1. What is a Small Business Corporation (SBC)?

A Small Business Corporation (SBC) is a company that meets certain criteria set out by the South African Revenue Service (SARS). Key requirements include:

• Turnover: Annual gross income not exceeding R20 million.

• Shareholders: Must be natural persons (no juristic persons unless permitted by law).

• Shareholding Restrictions: Shareholders cannot hold shares in non-permitted companies.

• Other requirements: The company must conduct business activities allowed under the SBC framework.

SBCs benefit from:

• Reduced corporate tax rates.

• Simpler tax compliance.

• Special deductions for small business expenses.

These benefits make SBC status highly advantageous for small and growing businesses.

2. Standard Corporate Tax for Non-SBC Companies

Businesses that do not qualify as SBCs are taxed under the standard corporate tax regime. Key features include:

• Corporate Tax Rate: Flat 28% for companies (as of the 2024/25 tax year).

• No special deductions: Companies pay tax on net profit after standard deductions but do not enjoy the graduated tax rates that SBCs benefit from.

• Limited small business relief: Non-SBC companies are not entitled to preferential small business allowances.

In practical terms, this means that small companies outside the SBC framework often face higher tax liabilities than qualifying SBCs with the same profits.

3. SBC Tax Rates vs Standard Corporate Tax Rates

SBC taxation is graduated, which means the tax rate increases as taxable income rises. This differs significantly from the flat corporate rate for non-SBCs.

3.1 SBC Tax Rate Table (2024/25)

Taxable Income (R)	SBC Tax Rate
0 – 95,750	0%
95,751 – 365,000	7% of taxable income above 95,750
365,001 – 550,000	R19,805 + 21% above 365,000
550,001 – 1,000,000	R64,805 + 28% above 550,000

Note: These thresholds are updated by SARS periodically, so always check the latest annual income tax tables.

Key Point: Small businesses with lower profits can pay little to no tax under the SBC regime, which is a huge advantage compared to paying a flat 28% as a regular company.

3.2 Standard Corporate Tax Rate

• All taxable profits of a standard company are taxed at 28%, regardless of the amount.

• Example: A company making R500,000 in taxable profit would pay R140,000 in tax.

• An SBC with the same profit could pay R64,805 + 28% on the excess over R550,000, which would be significantly lower or zero depending on the taxable income.

Summary: SBC taxation provides progressive relief, whereas standard corporate tax is flat and higher for small profits.

4. How SBC Taxes Are Calculated

SBC tax calculation focuses on taxable income and applies the graduated rates. Key points:

1. Determine taxable income: Income minus allowable deductions and expenses.

2. Apply SBC tax rates progressively: Tax increases with income, but lower brackets may pay no tax.

3. Distributions to shareholders: Unlike trusts or dividends, SBC owners pay personal income tax on withdrawals as salary or dividends, but the company’s preferential tax rates already reduce the overall tax burden.

Example:

• A small business makes R300,000 in taxable profit.

• Under SBC rules:

  • First R95,750 = 0%

  • R204,250 (R300,000 – 95,750) = 7% → R14,297.50 tax

• Under standard corporate tax:

  • 28% of R300,000 = R84,000 tax

Clearly, SBC status can result in substantial tax savings for lower-income companies.

5. Other Tax Considerations for SBCs vs Non-SBCs

5.1 Dividends Tax

• Both SBCs and non-SBCs are subject to dividends tax at 20% on any dividends declared to shareholders.

• This is separate from corporate income tax.

5.2 Compliance Simplicity

• SBCs benefit from simpler tax calculations due to graduated rates and small business allowances.

• Standard companies must calculate flat corporate tax and may have more complex compliance obligations.

5.3 Shareholder Restrictions

• SBCs must adhere to strict shareholding rules (direct natural person ownership, no shares in non-permitted companies).

• Standard companies do not face these restrictions, giving them more flexibility in ownership structure but without preferential tax rates.

6. Advantages of SBC Status for Entrepreneurs

1. Reduced tax liability: Especially for companies with profits under R1 million.

2. Cash flow benefits: Lower tax means more money retained for growth and reinvestment.

3. Encourages small business growth: Graduated rates support reinvesting profits rather than paying high taxes.

4. Simplified administration: Fewer complicated deductions and easier record-keeping.

7. Limitations and Risks of SBC Status

1. Turnover limitation: Businesses with revenue above R20 million cannot qualify.

2. Shareholding rules: Shares must be directly held by natural persons, and shareholding in non-permitted companies is prohibited.

3. Business activity restrictions: Certain investment or financial activities may not qualify.

4. Yearly compliance: Even one day of contravention (e.g., a shareholder briefly holding shares in a disqualified company) can disqualify SBC status for the entire year.

These limitations mean that careful planning is essential, particularly for business owners looking to hold multiple companies or grow beyond the SBC thresholds.

8. Practical Example: Comparing Taxes

Scenario: Company earns R500,000 in taxable income.

Type of Company	Tax Calculation	Tax Payable
SBC	Graduated: 0% on first R95,750 + 7% on next R204,250 + 21% on remaining	Approx. R64,805
Standard Company	Flat 28% of R500,000	R140,000

Impact: The SBC saves R75,195 in tax, which can be reinvested into growth, salaries, or other expenses.

9. Key Takeaways for Entrepreneurs

• SBC status is highly beneficial for small to medium businesses under R20 million turnover.

• Direct natural person ownership and compliance with shareholding rules are critical.

• Graduated tax rates make SBCs much more tax-efficient than standard companies.

• Non-SBC companies pay flat 28%, regardless of profit, which can significantly impact cash flow for small businesses.

• Entrepreneurs should plan ownership structures carefully, particularly if they intend to operate multiple companies.

10. Conclusion

Understanding the difference between SBC and standard corporate taxation is vital for business owners seeking to optimise tax efficiency in South Africa. While SBCs offer progressive tax rates, cash flow advantages, and simplified compliance, they also require careful attention to shareholding and operational rules.

Businesses that do not meet SBC criteria are subject to flat corporate tax rates, which can be considerably higher, especially for small and medium enterprises. Proper planning, legal compliance, and strategic structuring can help entrepreneurs maximise savings, grow their businesses, and avoid unnecessary tax risk.

At HAS Accounting & Tax, we guide business owners through these rules, helping them structure operations to take full advantage of SBC status where applicable while ensuring compliance with SARS.